It's not the '80s, but there's still real estate trouble

Downtown's Skyhouse towers - this is the completed one - are part of the area's added multifamily space.

Photo: Karen Warren, Staff

People who have worked in commercial real estate in Houston for any length of time tend to repeat a familiar refrain when asked how the current energy crisis is affecting their industry: "It's not the '80s."

Last week, commercial property investors and brokers from here and around the country took a more measured tone, noting the nuances but not glossing over the struggling state of this region's office and multifamily markets.

"It's not the same picture, but it's still not a pretty picture," said Lou Cushman, who opened Cushman & Wakefield Houston brokerage office in 1971 and is now the firm's vice chairman.

On a panel at the RealShare Houston conference, he recalled the 1980s, when there were so many distressed properties that "buildings were all but being sold by the pound."

Distressed sales haven't been much of an issue, but buyers have started looking for bargains.

"There are people all over the world waiting to see who's going to falter," said Paul Layne, executive vice president for Howard Hughes Corp. "I think there will be opportunities."

Parts of town where companies are scaling back are flooded with empty offices.

Cushman said as much as 10 million square feet of sublease space could be on the market by year-end.

One firm has already pegged that figure at 9.2 million square feet. In a recent report, commercial property firm JLL said the amount of space has doubled since late 2014. That was when the Saudi-led Organization of the Petroleum Exporting Countries abandoned its pattern of cutting the supply of oil to boost prices.

The companies that have given back the biggest blocks of space are almost all energy-related. They include ConocoPhillips, BP, Shell Oil Co., KBR, Phillips 66, Noble Energy and BHP Billiton, according to data from Transwestern.

Michael Dopler, vice president, acquisitions, AEW Capital Management, called west Houston's Energy Corridor "a pocket of distress" and that owners eventually will be forced to sell.

"The stat I heard the other day is if you're a tenant looking for a full floor of office, there's something like 200 options for you," he said. "That's a scary stat."

Even as low oil prices stoke fear and uncertainty about Houston's economy, some panelists voiced confidence that the energy decline could reverse course by fall 2017.

"My general experience on dealing with depressions and such would indicate we ought to be out of this in another 18 months," said Welcome Wilson, chairman of GSL Welcome Group.

While office towers and apartments continue to struggle with falling rents and rising vacancies, commercial property associated with health care, suburban retail and the industrial sector have been more healthy.

The speakers expressed long-term confidence about the region and said they've been having to battle misconceptions.

Even though the city added jobs last year, the perception was that jobs were lost.

"The long and short of our view is Houston is a global leader," said Bryan Sanchez, co-chief investment officer with Lionstone Investments. "It has all the ingredients to be a very competitive city globally."

But within the greater Houston area, "not all parts are equal."

Lionstone's investment focus is on parts of Houston and other cities with upscale demographics and a concentration of jobs that are also walkable.

USAA Real Estate is bullish enough to invest with Hanover in a second phase of an apartment project in the Galleria area.

The market is "going through some tough times right now, but we think it's going to rebound," said Carrington Brown, USAA's executive director of investments.

A downstream construction boom on the east side is helping bolster the economy.

"If you're outside of Texas, people say, 'Man, how bad is it?' It's not bad at all if you're in the industrial sector," said Curtis Spencer, president of IMS Worldwide.

But the industrial market on Houston's north side has been hit the worst from the oil field crisis, said David Hudson, senior vice president, Duke Realty.

"There's some pain up there in the north submarket," Hudson said. "You're going to see it there for a while."

Nancy Sarnoff covers commercial and residential real estate for the Houston Chronicle and the paper’s two websites: Chron.com and HoustonChronicle.com. She also hosts Looped In, a weekly real estate podcast about the city’s most compelling people and places. Nancy is a native of Chicago but has spent most of her life in Texas.